OPEC Agrees Historic Production Cut

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OPEC agreed yesterday to its first oil output cut since 2008. Saudi Arabia had to accept to reduce its production and to loosen its demand regarding Iran’s oil output. This decision pushed yesterday’s oil prices by around 10%.
Brent oil weekly
Brent oil weekly © forexop

Brent from the North Sea closed on Wednesday at $50.47 per barrel, or +8,82%, and the West Texas Intermediate at $49.44, or +9,31%.

Oil Rises Over 33% in 2016

In November, the WTI gained 5.5%, and Brent gained 4%, while they had respectively lost 2.8% and 1.6% the month before. So far this year, WTI is up 33.5%, and Brent 35.3% – but they are still down from their peak of 2014.

Volatility is still expected on the oil market, especially after the “announcement effect” is over. How can we be sure the deal will be respected? Can oil prices keep going further up?

OPEC

Today, the OPEC countries produce 1/3 of worldwide oil production, or 33.6 million barrels per day. From January, 1.2 million barrels should be reduced from this production level. A large chunk of this decrease will come from Saudi Arabia, who are aiming to decrease its production by 500,000 barrels per day, down to 10.06 million barrels per day. Qatar, Kuwait and United Arab Emirates have also agreed to cut their production by a total of 300,000 barrels per day.

Iraq has finally agreed to decrease its production by 200,000 barrels per day, down to 4.351 million. Libya and Nigeria are not going to participate to this oil production cut, and Iran is allowed to slightly increase its production, to reach 3.797 million barrels per day.

Another important aspect of this agreement is the cooperation and the participation of non-OPEC countries, who have agreed to cut their total production of 600,000 barrels per day, including a gradual cut of 300,000 from Russia during the 1st semester of 2017. The OPEC and non-OPEC members are scheduled to meet in a few days in order to discuss further details of the agreement.

Investment in Sector

Crude oil rises over 33% on the year
Crude oil rises over 33% on the year © forexop

This agreement could increase investment in the oil sector if prices stabilize themselves at a certain level – most likely around $50 a barrel. But investors should be careful, as it’s not unheard of for a country to back out of such an agreement, especially as there are no sanctions planned if a country doesn’t respect its production limitation.

Khaled al-Falih – Minister of Energy, Industry, and Mineral Resources of Saudi Arabia – said that there will be a monitoring mechanism to be sure that everyone is operating according to the terms of the agreement, and that non-OPEC countries will join the effort to reduce oil production, though there are no further details about what such a “mechanism” would entail. One thing is sure – investors will be watching closely to see if any country falls out of line…

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About the Author

Carolane de Palmas After graduating with a Masters in Corporate Finance & Financial Markets and getting the AMF Certification (Financial Markets Regulator in France), Carolane went to market analysis software company (Highwave360) to take part in the European launch of their new market analysis software (stocks and currency pairs). She then become an independent trader, investing mostly in European and American stocks and indices (CFDs) using macroeconomic and technical analysis.

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